Governance, CEO Power, and Relative Performance Evaluation Effectiveness

44 Pages Posted: 27 Feb 2018

See all articles by Lin Ge

Lin Ge

University of Mississippi

Frederik P. Schlingemann

University of Pittsburgh - Finance Group; Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); European Corporate Governance Institute (ECGI)

Hong Wu

Fudan University - School of Economics

Jing Zhao

Hong Kong Polytechnic University

Date Written: February 15, 2018

Abstract

We study whether changes in corporate governance and CEO power affect bonus-based implicit relative performance evaluation (RPE). We rely on a regression discontinuity design of shareholder proposals to proxy for shocks to CEO power. The effect of shareholder proposals on RPE is stronger under situations where shareholder proposals are expected to better capture changes in CEO power. We identify important real effects associated with the strengthening of RPE and find that idiosyncratic risk increases and co-movement decreases between firms and their peers in terms of changes in capital and inventory investment and changes in Tobin’s Q after a shareholder proposal is passed.

Keywords: RPE, corporate governance, CEO power, shareholder proposal

JEL Classification: G34

Suggested Citation

Ge, Lin and Schlingemann, Frederik Paul and Wu, Hong and Zhao, Jing, Governance, CEO Power, and Relative Performance Evaluation Effectiveness (February 15, 2018). Available at SSRN: https://ssrn.com/abstract=3124321 or http://dx.doi.org/10.2139/ssrn.3124321

Lin Ge

University of Mississippi ( email )

Oxford, MS 38655
United States

Frederik Paul Schlingemann (Contact Author)

University of Pittsburgh - Finance Group ( email )

368A Mervis Hall
Pittsburgh, PA 15260
United States
(412) 648 1847 (Phone)
(412) 648 1693 (Fax)

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Hong Wu

Fudan University - School of Economics ( email )

600 GuoQuan Road
Shanghai, 200433
China

Jing Zhao

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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